I provide sound counsel and achieve outstanding results for clients in criminal and civil tax litigation and asset forfeiture litigation throughout the United States. I also perform estate planning for Michigan residents. My firm, Dunn Counsel PLC, is based in Troy, Michigan. I earned my B.S.B.A. cum laude from Aquinas College in 1978, my J.D. from Notre Dame Law School in 1985, and my LL.M. (Taxation) from Washington University in St. Louis in 1991. Before law school I was a Senior Accountant on the Audit Staff of Ernst & Young. This blog examines current issues arising in my law practice.

To OVDP Or Not To OVDP: Compliance Options For Holders Of Foreign Accounts

Taxpayers who failed to timely report foreign accounts on Form FinCEN 114 (formerly Form TD F 90-22.1) (“FBAR”) filed with the Internal Revenue Service (“IRS”) faced a dilemma. They could file a preclearance letter with the IRS Criminal Investigation Division (“CID”) seeking acceptance into the IRS’ Offshore Voluntary Disclosure Program (“OVDP”). Upon receipt of a preclearance letter, CID checks its files and determines whether there is an examination, investigation, or prosecution underway against the taxpayer. If there is not, CID sends the taxpayer a letter telling him that he is conditionally accepted into the OVDP, and that if he completes the program’s requirements, he will not be prosecuted for failing to file an FBAR or for failing to report income from a foreign account on an income tax return, and that his civil penalty for failing to report the foreign account on a timely-filed FBAR will not exceed that of the OVDP—27.5% of the highest balance in the accounts over the preceding eight years.

The OVDP requirements are punitive. The taxpayer must—

sign consents waiving the statute of limitations on assessment of an FBAR penalty and income tax, penalties, and interest with respect to the account;

file FBARS for the foreign account for the preceding eight years;

file an income tax return reporting the account for each of the preceding eight years;

pay a penalty equal to 27.5% of the highest balance in the account in the preceding eight years (12.5% if the balance did not exceed $75,000, or 5% if the taxpayer did not willfully fail to report the account on an FBAR); and

pay income tax on income generated by the account over the preceding eight years, together with an accuracy penalty equal to 20% of such income tax, and interest.

To accomplish the foregoing, the taxpayer will incur substantial legal and accounting fees.

The stakes are high for a taxpayer who does nothing to comply with U.S. law concerning a foreign account. Failure to timely file an FBAR is subject to assessment of a civil penalty of 50% of the highest balance in the foreign account for each of the open years of the statute of limitations. Failure to timely file an FBAR can also be prosecuted. Income from a foreign account not reported on an income tax return is subject to assessment of income tax and penalty, and interest. The penalty is 20% of the tax or, in egregious cases, 75% of the tax for fraud. Willful failure to report income on an income tax return is also subject to prosecution.

Beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a civil penalty not of 27.5%, but of 50%, if, at the time of submitting his preclearnace letter to IRS Criminal Investigation, an event has occurred constituting a public disclosure that the foreign financial institution, or another person who facilitated the taxpayer’s account at the foreign financial institution, is under investigation, or is cooperating in an investigation, by the IRS or the U.S. Department of Justice concerning accounts beneficially owned by U.S. persons, of has been identified in a John Doe summons concerning such accounts. The U.S. Department of Justice publishes a list of such foreign financial institutions. If the 50% penalty applies to any of a taxpayer’s foreign financial accounts, it applies to all of his foreign financial accounts.

An FBAR for a given calendar year is due to be filed by the succeeding June 30. The statute of limitations on assessment of a civil penalty for failure to timely file an FBAR is six years, 1 USC § 5321(b)(1), and it begins to run on the due date of the FBAR. Unites States v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012).

Willful failure to file an FBAR when one is due is a crime, punishable by fine of not more than $250,000, or imprisonment for not more than five years, or both. 31 USC § 5322(a). But 31 USC § 5322 is silent about a statute of limitation on a prosecution. In such cases, courts borrow a statute of limitations from another, like statute. In the only case on point, United States v. Lowery, 409 Fed. Supp. 2d 432, 441 (W.D. Va. 2006) the United States District Court for the Western District of Virginia engrafted the catchall, five-year statute of limitations of 18 USC § 3282 onto 31 USC § 5322(a). As a result, an indictment returned on February 17, 2005 charging violation of 31 USC § 5322(a) for failure to file FBARs due on June 30, 2000 and June 30, 2001 was timely.

The statute of limitations on assessment of income tax or penalty is three years, and it begins to run from the filing of the return. 26 USC § 6501(a). The statute of limitations on assessment does not begin to run with respect to an income tax return not filed. 26 USC § 6501(c)(3). There is no statute of limitations on assessment with respect to a tax return that is fraudulent or willfully false. 26 USC § 6501(c)(1), (2).

The statute of limitations on a prosecution for tax evasion is six years, 26 USC 6531, and it begins to run on occurrence the last affirmative act of evasion, which may be after the filing of the false, fraudulent tax return, United States v. Dandy, 998 F.2d 1344, 1355-56, reh’g, en banc, denied, 1993 U.S. App. LEXIS 23870 (6th Cir. 1993), cert. denied, 510 U.S. 1163, 127 L. Ed. 2d 538, 114 S. Ct. 1188 (1994); United States v. Winfield, 960 F.2d 970, 973 (11th Cir. 1992), or after the due date of a tax return not filed. United States v. Ferris, 807 F.2d 269, 271 (1st Cir. 1986), cert. denied, 480 U.S. 950, 94 L. Ed. 2d 798, 107 S. Ct. 1613 (1987).

Streamlined Offshore Compliance Procedures

On June 18, 2014, the IRS announced Streamlined Offshore Compliance Procedures (“Streamlined Procedures”). The Streamlined Procedures are not punitive, and are more effective than the OVDP in encouraging compliance with the law. Significantly, the Sreamlined Procedures are available only to taxpayers whose failure to timely file an FBAR was not due to willful conduct.

Streamlined Procedures U.S. Taxpayers Residing Outside the United States

A U.S. taxpayer residing outside the United States is eligible for the Streamlined Procedures if (1) he meets a non-residency requirement; (2) he has failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR with respect to a foreign financial account; and (3) such failures must result from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

U.S. citizens or lawful permanent residents meet the non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (as for extended) has passed, the individual did not have a U.S. abode, and was physically present outside the United States for at least 330 full days.

Individuals who are not U.S. citizens or lawful permanent residents meet the applicable non-residency requirement if, in any one or more of the last three years for which the U.S. tax return due date, as extended, has passed, the individual did not meet the substantial presence test of Internal Revenue Code § 7701(b)(3).

For eligible U.S. taxpayers residing outside the United States, the requirements of the Streamlined Procedures are as follows:

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